Monday, 12 September 2011

£4m For A Few Weeks’ Work? It’s Normal Practice, So Don’t Haggle

I don’t pretend to understand how those in the City make their huge bonuses – I’m not sure they do either – but occasionally I get first hand experience of the business practices that fuel this excess….

I have been a non-executive Director of Holidaybreak plc for the last seven years. Holidaybreak is a large travel group covering a range of businesses from PGL (school trips) to Keycamp (family holidays in mobile homes at campsites throughout Europe). Almost without exception the people I have met who are working at Holidaybreak have been down to earth, hard working and passionate about the service they are providing. This isn’t glamorous work; the largest number work on site, often cleaning the facilities, and earn a below average wage.

Even at senior levels we have tried to hold to a policy of paying our senior executives salaries below the average pay for their roles (somebody has to be below average if the average isn’t to rise forever), and avoided the appalling golden parachutes that people can sometimes get when they leave. As a team we have tried to reward performance, something that hasn’t always been forthcoming in the current economic environment.

Recently the business received an approach from Cox and Kings, an Indian travel group, to buy Holidaybreak. This ultimately led to us accepting a bid and in the next few weeks shareholders will receive the proceeds of this. As is normal, in fact required, the board hired an investment bank, supposedly to ‘advise’ on how to deal with potentially selling the company.

We all knew that the bank would be paid only if a deal was completed. To some degree this makes sense as shareholders don’t necessarily want to rack up expenses if no transaction takes place, a bit like when you sell a house through an estate agent.

We were also wise enough to know what a ‘no sale, no fee’ arrangement does for the bank’s incentives. As Warren Buffett says, ‘you don’t ask a barber if you need a haircut’. We couldn’t and didn’t let the bank lead the negotiations. Effectively their compromised position prevented the bank’s team, however clever, from adding significant value. Their advice, however worthy and well presented by capable people, was considered tainted.

So how much did we pay for this work? Well you might think that to answer that in a meaningful way would require some knowledge of how much effort they put in. Did they have a team of dozens of high flyers working round the clock for six months? Had they put in thousands of man-hours in advising Holidaybreak on aborted transactions in the past?

I’m afraid I don’t know the answers. Their opening proposal for a fee was over £4m based arbitrarily on 1% of the total (debt and equity) value of the transaction. Why 1%? Because it’s normal, conventional, what everyone does…

Now many of us have paid estate agents a fee based on a percentage of the property value – maybe a fee of a few thousand in total. But at least in most cases the agent found you the buyer, led the price negotiation and managed the complicated process of keeping the often emotional transaction on track. For Holidaybreak the buyer found us, any potential counter-bidders were known to us, we led the negotiation as we didn’t trust the bank’s incentive, and our team, the lawyers and others handled the largely administrative process of completing the transaction.

I’m told, and tend to believe, that most companies simply would have paid the £4m. I estimate the total effort put in by the bank’s senior team at no more than 100 days, probably much less. At £4m the fee is £40,000+ a day – making Premiership footballers look rather impoverished.

We tried to haggle, we asked for details of time spent working on the deal; we stopped making eye contact, we made it clear we didn’t care about the implied ‘reputational’ cost of not playing the game (that the bank would not recommend us for other senior jobs). In the end we were plain unpleasant at times.

This generated a great result: we saved £2m, and all but halved the fee. It was clear from the bank’s body language that we’d broken the unwritten rules. Great – but that’s still £20,000 a day?! To my mind probably still at least 10 times too high, maybe 100 times. But it was as far as we could get without risking the Cox and Kings deal, which we know would benefit shareholders.

Nice work if you can get. And damn hard to explain to the hard working folk at Holidaybreak.

No comments:

Post a Comment